Risk Vs. Return of Information Technology Investment

University Of California-Irvine, Irvine CA

Investigators

Abstract

There is ample anecdotal evidence that IT investments are quite risky. Studies have shown that as much as 70% of IT projects are either cancelled, or completed late or over-budget. Yet, IT risk is virtually absent in the burgeoning literature on the returns on IT investment. This omission of IT risk considerations might explain in part the unusually high estimates of returns on IT investment, in recent research. At the same time, the debate in the IT returns literature is shifting from the "productivity paradox" to the "new productivity paradox," wherein what is puzzling is not the lack of evidence of returns on IT investment, but inexplicably high estimates of the same. This new puzzle provides the theoretical motivation for this project, which will broadly examine the impact of IT risk on the cost of IT capital, and on the productivity and market value of firms. The specific objectives of this project are: (1) to incorporate IT risk into existing empirical frameworks for characterizing IT returns, (2) to generate empirical metrics of IT risk at the firm and industry levels, and (3) to assess the risk-adjusted return on IT investment. The analysis of these issues will be conducted using a comprehensive set of research methods, including production function analysis, market value analysis, event study methodology, and field study research. The impact of IT risk will be analyzed at two levels of analysis or aggregation, IT capital and IT projects, echoing the existing research literature on the returns on IT investment. This will yield empirical estimates of the impact of IT risk on the cost of IT capital, and on the market value of firms. The findings are expected to be of interest to multiple disciplines including information systems and accounting. Broader Impacts: The intellectual contributions of this research will impact both industry practice and policy formulation. The results of this study will provide a scientific platform for an informed discussion of IT risk management, an increasingly critical concern in the industry and society of the digital age. Accordingly, the findings from this study will be disseminated in practitioner and policy-oriented outlets as well as in inter-disciplinary academic journals. Practical issues surrounding IT risk management will constitute the focus of the field studies, which will involve undergraduate students in the research; this involvement will advance knowledge discovery while promoting teaching and learning.